Headlines – Week of May 2, 2010
May 9, 2010
Condos with water views escaped brunt of housing crash
A recent article published in the Sun Sentinel (Broward/Palm Beach, Florida) discussed the effect of water views and its affect on real estate values during the current recession. Nearly every condo in South Florida lost value in the past four years, with some dropping 50% or more. However, despite this overbuilding oceanfront properties did not take the same hit as those build more inland.
The median price for existing condos in Broward in March 2010 was $73,600, a 66% drop from the February 2006 peak of $216,800, according to the Florida Realtors association.
Palm Beach County’s March 2010 median was $90,900, a 61% slide from the July 2006 peak of $231,300.
Short-term investors helped create the housing boom during the early part of the past decade, scooping up units at preconstruction prices and then flipping them for huge profits in a matter of days or weeks.
To meet the seemingly insatiable demand, and with a dearth of prime locations available, South Florida developers started converting modest apartments – even those near railroad tracks with no water views – into condos, with some prices approaching $300,000.
According to the article, while virtually no buildings have been spared, values in high-end condos hugging the coast have been the most resilient because of the inherent lure of the ocean and Intracoastal Waterway.
Oversupply developed everywhere when developers flocked to the downtowns of Miami and West Palm Beach in the past 10 years, ultimately creating a glut of empty units that still has prices there depressed.
Fort Lauderdale was one area however, where city commissioners limited the number of downtown condo units in response to concerns about overdevelopment.
Las Olas Grand opened near housing boom in summer 2005, but it hasn’t been hurt by vacancies or owners in financial distress. 213 units in the project are selling for $550,000 to $1.8 million, down from $750,000 to $2 million during the boom years. During the first three months of 2010, six units sold there. On average, the sellers got a quarter less than they paid, not bad compared the averages noted above.
In Palm Beach County, Mizner Tower in Boca Raton also has avoided major price declines, in part because it’s a stable development that opened more than a decade before the boom. The 136-unit Mizner Tower, which opened in 1989, sits on the grounds of the Boca Raton Resort and Spa and also has views of the ocean and Intracoastal.
Foreign buyers kick-start Orlando-area condo sales
According to an article published in the Orlando Sentinel, condominiums are now selling faster in Central Florida than they did at the peak of the real estate market four years ago.
In March 2010, buyers closed on 790 condo units in the four-county metro area, 25% more than in March 2006, when real estate agents made 630 sales.
Who is buying all of these units?
According to brokers, industry reports and others, foreign buyers are largely behind the surge.
As an example, about 80% of the sales these days at the Mosaic at Millenia, a south Orlando apartment complex that went condo in 2004, have been to international investors.
According to realtors, they are paying all cash, and their primary purpose is to get a monthly rented unit that provides cash flow with the expectation of some appreciation. Unlike the deals that drove condo speculators during the frenzy of the mid-2000s, these sales aren’t based on incentives or inflated promises of rental income; they aren’t paying inflated prices either. In March 2006, the median price of the condos sold in Metro Orlando was $159,600; by March of 2010, the median had dropped 69% to $49,700.
According to a report by the National Association of Realtors, the sharp decline in prices since the market’s peak in 2005-06 is part of the reason Florida accounted for almost 25% of all U.S. property purchases by international buyers in late 2008 and early 2009. California was second with a 13% share of the foreign market.
Nationwide, those foreign buyers paid a median of $247,100 during the period studied, compared with a median of $198,100 for all buyers. About 70% of the purchases were single-family homes, 18% were multifamily, and the rest were commercial properties.
In Florida, most foreign buyers come from the United Kingdom, other parts of Europe, and Canada.
A recent survey by the Association of Foreign Investors in Real Estate ranked Orlando 12th among U.S. cities for investment opportunities. The last time members felt as strongly about U.S. real estate was in 2003. In the group’s fourth-quarter survey, two-thirds of those who responded plan to increase their U.S. holdings this year compared with 2009.
University of Florida: Florida real estate market has hit bottom
According to the most recent Survey of Emerging Market Conditions published by University of Florida, the Florida real estate markets show the first tentative signs of recovering from the most painful recession in the state’s history.
Results of their first quarter survey indicate that the real estate market in Florida has hit bottom and is in the process of stabilizing across most property types. However, most of the respondents in their survey indicate that the market probably won’t get any worse and a few will tell you that things are getting better.
On the positive side, private capital, both foreign and domestic is continuing to enter the state in search of quality investment deals. As banks start to deal with their problem assets, more deals will come to market.
Another good sign: Life insurance companies have started to re-invest in commercial properties after backing off for the last year and a half as they see the fundamentals of the economy stabilizing and they see the opportunity to get quality assets at a good price.
On the negative side, unemployment continues to be one of the state’s biggest problems, edging up to 12.3% in March, its highest level since the state began keeping count in the 1970s.
Although there is a potential for job growth later in the year, even under the most optimistic assumptions the report indicates it will take three to four years to return to 2006 levels.
Also of concern is the continued reluctance of commercial banks to lend money because of pressure from regulators to manage risks along with depressed values that make it difficult to refinance mortgages.
The retail and office markets are the worst off and until there is an increase in job growth, there is no need for more office space. Apartments continue to be the best market in the state due to high demand from people moving out of foreclosed homes. Statewide, Florida’s new housing market will continue to be slow, a result of more foreclosed homes becoming available.
One of the strongest areas of the state is South Florida, especially Miami-Dade and Broward counties, with their diverse economies, steady migration and influx of foreign capital. The glut of condos in South Florida is actually starting to change hands, investors are beginning to rent them and there is more life in downtown Miami than there has been in a long time.
The report predicts that Florida’s big cities Orlando, Tampa, Jacksonville and Miami are less bad off than the rest of the state, and they’re going to recover quicker than other places.
Jacksonville, in particular, is in a good position because its housing market never got as hot as other markets; and, as a result, it doesn’t have as many foreclosures.
Fitch: Commercial mortgage defaults to keep rising
According to Fitch Ratings, defaults on the loans behind U.S. commercial mortgage backed securities will continue to rise through the year.
The agency expects the overall rate of default for deals it has rated to exceed 11% by year-end.
That spike would follow a more than fivefold increase in loan defaults last year, to 1,464 loans totaling $17.75 billion, with 34% of defaults happening in the last three months of the year.
Fourth-quarter default rates reached their highest ever levels both in principal balance and number of loans with no clear signs of stabilization according to Fitch.
One big area of concern is large loan defaults. In 2009, 56 loans over $50 million in size defaulted, compared with just five in 2008.
Most of those loans were written between 2006 and 2008, which Fitch said was not surprising. In fact, deals made in 2007 accounted for 35.6% of the principal balance of defaulted loans.
Aggressive underwriting and higher leverage in the 2007 is leading to substantially higher default rates. Fitch predicts 10-year cumulative default rates on 2007 Fitch-rated commercial mortgage backed securities to reach 27%.
Retail property mortgage defaults had the most new defaults, taking the top spot from multifamily properties for the first time in five years. After those two, office and hotel mortgages followed. Fitch expects sizable default increases for each property type, with rates likely to increase at accelerated rates for office and hotel loans.
Larger concentrations of hotel loans in recent vintages will translate to higher defaults, particularly among luxury properties, resort destinations and those hotels heavily reliant on group and convention business.
Posted by Scott R. Lodde